Page 164 - DCOM404_CORPORATE_LEGAL_FRAMEWORK

Unit 8: Formation of Company

Notes
Example: The articles of a company provided that Eley should be solicitor for life to the

company and should not be removed from office except for misconduct. Later on he also became a
member of the company. But after employing him as a solicitor for a number of years, the company
discontinued his services. He, being a member, sued the company for damages for breach of the
contract contained in the articles of association. Held: His suit was dismissed on the ground that,
he, as a solicitor, was no party to the articles. He must prove a contract independent of the articles.
There was no infringement of his right as a member. The breach of contract was there but in his
capacity as a non-member [Eley v. Positive Government Security Life Assurance Co., (1876) 1 Ex.
D. 88].
Whether directors are bound by whatever is contained in the articles? Yes, the directors of the
company derive their powers from the articles and be subject to limitations, if any, placed on
their powers by the articles. If they contravene any provisions of articles, two parties may be
affected: (1) the company itself and (2) the outsiders.

In case of contravention of the provisions of the articles, the directors render themselves liable to
an action at the instance of the members. However, members may ratify the act of the director,
if they so desire. But if as a result of the breach of duty any loss has resulted to the company, the
directors are liable to refund to the company any damage so suffered.
Further, where the directors contravene the provisions of the articles, it may affect outsiders’
interest also. This is explained below with the help of a case, viz., Royal British Bank
v. Turquand.

8.4.8 Constructive Notice of Articles and Memorandum

Section 610 provides that the memorandum and articles, when registered, become public
documents and then they can be inspected by anyone on payment of a nominal fee. Therefore,
any person who contemplates entering into a contract with the company has the means of
ascertaining and is thus presumed to know the powers of the company and the extent to which
they have been delegated to the directors. In other words, every person dealing with the company
is presumed to have read these documents and understood them in their true perspective. This is
known as ‘Doctrine of Constructive Notice’. Even if the party dealing with the company does not
have actual notice of the contents, it is presumed that he has “constructive notice” of them.

Example:
(i) One of the articles of a company provides that a bill of exchange to be effective must be
signed by two directors. A bill of exchange is signed only by one of the directors. The payee
cannot claim under the bill.
(ii) In Kotla Venkataswamy v. Ram Murthy AIR (1934) Mad. 579, the articles provided that all
deeds and documents of the company shall be signed by the managing director, secretary
and working director. A mortgage deed was accepted with secretary and working director’s
signature only. Held, the deed was invalid.
(iii) Similarly, if a person enters into a contract which is beyond the powers of the company, he
cannot acquire any right under the contract against the company.

8.4.9 Doctrine of Indoor Management

The doctrine of constructive notice throws a burden on people entering into contracts with the
company that they are presumed to have read the documents, though in fact, they might not
have read them. On the other hand, the doctrine of indoor management allows all those who
deal with the company to assume that the provisions of the articles have been observed by the

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